ARCH EFFECTS AND COINTEGRATION - IS THE FOREIGN-EXCHANGE MARKET EFFICIENT

Extensive empirical work has produced mixed evidence regarding the val idity of the unbiased efficient expectations hypothesis in the foreign exchange market, Empirical analysis in this paper, via cointegration techniques, produces the same inconclusive results for three currency markets, namely, the EER/$US, the DM/$US and the Yen/$US foreign excha nge market. However, when modeling conditional heteroskedasticity of e xchange rates, through autoregressive conditional heteroskedasticity ( ARCH) models, the results are fairly conclusive; the presence of the e fficient foreign exchange market hypothesis is found in all these thre e currency markets.